Greenwich's rise as a 'hedge fund capital'

Maggie Gordon

Published 1:00 am, Sunday, November 16, 2014

It's Thursday night in Greenwich, and the sounds of wine glasses clinking and shoptalk reverberates through the hallowed halls of Indian Harbor Yacht Club as 200 hedge fund professionals mingle and sip. White collars crest over the top of expertly tailored suit jackets and fancy fountain pens rest in blazer pockets, ready to take down phone numbers or notes from a discussion about CalPERS's decision to stop putting California state pension money into hedge funds -- a limited partnership of investors that uses sophisticated methods, such as investing with borrowed money, in hopes of realizing large gains.

Just another night in a small town that, for many, is as definitively known as The Hedge Fund Capital of the World as Connecticut is known as The Nutmeg State.

Home to firms including AQR Capital Management, Lone Pine Capital and Viking Global Investors -- all three of which ranked in the top 10 on Institutional Investor's list of the world's top 100 hedge funds -- and the personal residence of hedge fund scion Ray Dalio, whose mega-fund Bridgewater Associates is in Westport, Greenwich has risen to prominence over the past couple of decades as firms have left New York City in favor of a more bucolic location.

"Right now, Connecticut is No. 2 in the U.S., when you're looking at the assets under management. With about $350 billion in assets in the state, we're second to New York City," McGuire said.

On the global scale, the greater Greenwich hedge fund zone, which includes Westport, Norwalk and Stamford -- where the likes of Greenwich resident Steven A. Cohen and Darien's Richard Chilton set up their hedge funds -- comes in at No. 3 as New York and London breeze past the region.

"Really what is meant when people say Greenwich, or Connecticut, is the hedge fund capital is a density rating," said McGuire.

Think Silicon Valley, but substitute derivatives for binary code.

"If you're trying to say that California is the tech capital of the world, you could probably make an argument that there are more tech companies outside than inside," McGuire said. "So why is Silicon Valley the capital? Because in the small space, you get a really big cluster. And the same thing is going on here."

Somewhere between 240 and 300 funds call Connecticut home, and while there may be a handful sprinkled in Hartford and New Haven, most have planted their flags in lower Fairfield County.

"Greenwich originally benefitted back about 20-plus years ago in that it was close to New York City and there was an attractive state tax, relative to New York," said Marc Gabelli, president of Greenwich-based Gabelli Group Capital Partners and senior portfolio manager at GAMCO. Son of billionaire Mario Gabelli, Marc Gabelli has been active in hedge fund management since 1990. That decade was something of a renaissance for hedge funds, with the number growing exponentially, until there were about 4,000 funds by the time the millennium rolled over.

Then, in the wake of the terrorist attacks that felled the Twin Towers, Greenwich became an escape from Manhattan.

"There's no question that 9/11, the initial reaction was for people to want to get away from New York, worrying about it happening again," said David Lehn, a partner at the Greenwich office of Withers Bergman, a commercial law firm that works with local hedge funds.

'Better lifestyle'

With many fund managers already living in town due to Greenwich's reputation as a hub for hobnobbing head honchos, moving small arms of these businesses here was a no-brainer.

"Many of the people that run these funds are those who have left larger financial institutions in the New York area," Lehn said. "They still want to be close to New York, but they want to have a better lifestyle."

So they set up offices a short drive from home, where they could run to their kids' 4 o'clock soccer games before ducking back into the office.

"Why not work 10 minutes from home instead of schlepping into New York every day?" McGuire asked.

It was that kind of thinking that lured in big fish like AQR, which manages $105 billion.

"Greenwich is a great community which has a vibrant local economy and wonderful schools for our professionals' children," said AQR co-founder David Kabiller. "Having our global headquarters here has served us well for more than 15 years."

The trend of moving into Greenwich snowballed in the early 2000s, thanks in large part to the tax advantages of choosing Connecticut over New York. (Institutional Investor reported in 2003 that a professional making $10 million a year could save about $500,000 in local income taxes working in Connecticut instead of New York). That tax gap has thinned significantly in recent years, but not enough to weaken Lower Fairfield County's hold on the hedge fund industry.

"We're in a stage where there's enough critical mass that you have a cluster advantage in Greenwich now, which is very hard to compete away," Gabelli said. "People can exchange ideas and be really competitive in the markets. You could say that Greenwich's role in the hedge fund phenomenon is like the Florence of Renaissance Europe, or a parallel of Silicon Valley."

Competing with Florida?

And Greenwich's cluster is dense. While New York may have more assets and a greater number of funds, the saturation is diluted by the large number of businesses and people pulsing through the city streets. In a smaller environment like Greenwich, where the population hovers around 60,000 people, and lower Fairfield County as a whole, where the Census counts fewer than a half-million people, a high concentration of hedge funds rises to the top of the county's economic engine.

According to data from the U.S. Census Bureau, almost 20 percent of the workforce over the age of 16 in Greenwich worked in the finance and insurance fields last year, compared with 12.4 percent in New York City and just 4.7 percent of workers across the U.S.

That kind of prominence provides a sense of security that the industry will continue to grow and thrive in the area -- even if other parts of the country try to edge Greenwich out of the game.

Earlier this year, luxury magazine Dujour called Palm Beach, Fla., the "new Greenwich" for Wall Streeters, noting that "for hedge fund managers who might normally be inclined toward Westchester or Connecticut, the allure of South Florida is as plain as grits on toast" thanks to low taxes and weather that Northeast towns just can't beat.

Indeed, former Greenwich resident Eddie Lampert and his $9 billion hedge fund, ESL Investments, moved to Miami in 2012.

The Wall Street Journal also recently reported that 92 percent of hedge funds launched in 2009 and 2010 opened their doors in Manhattan when choosing between New York, Greenwich and Stamford.

It's the kind of competition that McGuire said Connecticut needs to pay attention to, as he hears more and more anecdotal tales of managers setting up satellite offices near winter homes in Florida.

"Maybe it's to get their feet wet in establishing a presence there for the possibility of moving the firm, getting people used to working out of there, or maybe just a long-term place where the heads of the firms are thinking will be a good place to retire," he said. "But Florida is making a big push for this business & and this is something that all of these heavily taxed states in the Northeast have to contend with."

Despite this, Gabelli said he isn't concerned about Greenwich's future.

"Once a cluster gets developed, it's hard to take away the benefits a cluster brings," he said. "Clusters have their own internal dynamic. You have local competition, and you have a wealth of people along Greenwich Avenue with similar interests mingling with people, you can't just duplicate something like that."